Funny about Money

The only thing necessary for the triumph of evil is for good men to do nothing. ―Edmund Burke

Layoff Plans: Use savings or start Social Security?

The other day I realized that in theory I have enough in savings, should the legislature’s proposed destruction of the Great Desert University and the resulting layoff occur, to get by for about a year if I use the money I’ve saved to pay off the Renovation Loan to live on instead of paying the loan.

It’s an interesting and reassuring idea. But let’s consider: would it be better to use savings to live on before I reach full retirement age, when (assuming Obama doesn’t reduce everyone’s payments) I will be eligible for $1,472 a month ($17,664 a year)? Or should I, instead, take the amount for which I’m presently eligible, $1,156 ($13,872 a year), use it for living expenses until I’m 66 (full retirement age), and then raid my savings to pay it back so that I can reset my payments to the full $1,472?

I have $21,000 saved to pay off the loan’s principal, which is a 30-year fixed-rate affair with a tiny monthly payment. If it were added to my total retirement savings, it would add about $840 (at 4%) to $1,050 (at 5%) a year to my annual drawdown.

Which route would reduce my total retirement savings the least?

Let’s say I’m laid off in February. That would leave 27 months until I reach full retirement age.

If I take Social Security today, my benefit would be $1,156 a month, which is $13,872 a year.

So, if I do start taking Social Security in March 2009, I draw down $1,156 x 27 months, or $31,212. This is the amount I would have to withdraw from retirement savings to reset my Social Security payments to $1,472 at age 66, if I start taking Social Security right away.

If I do not start taking Social Security in March, but instead live for a year on the savings pot and then start drawing Social Security, at that time I have 15 months until I’m 66. Let’s assume I would still get the $1,156 I’m entitled to now, even though in fact it would be somewhat more:

$1,156 x 15 months = $17,350. This is the amount I would have towithdraw from retirement savings to reset my Social Security payments to $1,472 at age 66 if I defer taking Social Security for a year.

However, by this point I’ve already spent down $21,000 of savings: $21,000 + $17,350 = $38,340. This strategy—using savings to defer taking Social Security for a year—ends up costing me $7,128 more than starting Social Security right away!

If I kept the $21,000 and the $7,128 amount is folded into my retirement savings, I can draw down 4% or at most 5% a year: this would add $285 to $356 a year to my total retirement income from savings.

But…it’s not that simple: I’m presently paying $2,040 a year on the Renovation Loan. If I don’t prepay the principal, that goes on for another 29 years, costing me $59,160 (should I live that long). Well, $59,160 is quite a lot to pay toward a $21,000 loan, eh?

Still, I have to think about what’s in my pocket to pay for groceries. Besides, let’s get real: I’m not going to live another 29 years!

In terms of what I have to live on, irrespective of the actual cost of the loan, the full-retirement benefit is $3,792 more than the annual age 63 benefit. That’s $1,752 a year more than the annual cost of the loan. Meanwhile, if I hang on to my $21,000 and roll it into my retirement savings, it generates an extra $840 to $1,050 a year, for a total of $2,592 to $2,802 more than the loan costs.

Evidently, if these figures are correct, it would be better not to pay off the Renovation Loan but instead to start collecting Social Security right away.

In fact, if I delayed taking Social Security a year, the amount I would collect then would be larger and so the amount I’d have to pay back to the system would be larger, putting me at an even larger disadvantage if I’ve used up the $21,000 of savings.

Clearly, my best course of action is to keep my $21,000, retain the debt, and start collecting Social Security right away. Then pay back the amount I’ve collected by age 66, reset Social Security to the full retirement age amount, and draw down 4% or 5% of the $21,000 as part of my total retirement savings drawdown, for a total income from savings of about $18,600 to $23,300 a year.

This would create a maximum passive income at age 66 of $40,660. Not adjusted for inflation. I could live on that…assuming taxes haven’t reached the astronomical level by then.

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Author: funny

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2 Comments

  1. Using your calculations, if you return the $31,212 to reset the SS, it’ll take 8 years & 3 months to recover it (the difference between “new” $1472 & the “old” $1156). You’ll be 74 years & 3 months (or so) before you start to profit from this “benefit resetting.” That doesn’t factor in any interest that you might have earned w/ the $31,212.
    My wife & I have decided (for us) to start taking Social Security at 62 (or as soon as possible!). The one thing that money can’t buy is more time, and while I’m not planning on going soon, you never know! When we’re eligible for full benefits (if we’re still here) we could reset them, if we wish. Probably we won’t, but we’ll make that decision then, or the survivor will.

  2. Hmmm…. In terms of principal, yes. In terms of cash flow, though, here’s how I see it (but remember…i are a english major, i are not a mathematician):

    If I kept the $31,212 in my savings and, at age 66, started to withdraw 4% of it, it would produce $1,248 a year, or $104 a month. If, on the other hand, I repaid $31,212 to Social Security and reset my benefit payments, the increase in benefits would be $316 a month — more than three times what I could get off my savings.

    Remember, too, that unless the market improves significantly very soon, I can’t draw down 4% or any percent from my savings to support myself between now and the time I’m 66. It would be highly unwise to start drawing down savings while they’re losing value, and highly unwise to sell all my investments on the downtick to move them into CDs that earn virtually nothing. By the time I’m 66, the economy may be starting to improve, and so at that time I may not be locking in losses by selling $31,212.

    Also bear in mind that when you repay the amount you’ve withdrawn from Social Security, the government turns around and refunds your taxes. Twenty percent of $31,212 is $6,242, which would go directly back into retirement savings; thus the net amount of funds I’d turn back to the government would be $24,970.

    Effectively, I’d end up with a $316/month annuity payment on $24,970. That’s far better than my money would do in the market if the market were returning a healthy 9 percent a year, and one heckuva lot better than it would do in CDs.